Banks loosen credit standards as consumer spending improves

minimum credit score

Credit standards are loosening as banks compete for loans, consumer spending increases and the lending business returns to normal. Image: CC channelR/Wikimedia Commons

Banks are continuing a trend of loosening credit standards in the U.S. According to a Federal Reserve survey, competition among banks to make loans to large companies is forcing them to ease credit terms. Banks are also making it easier for consumers to get credit cards.

Lending gains momentum

Competition among banks to make loans to prime corporate borrowers is increasing. In response, banks are easing lending standards, a sign that lack of credit will be less of a drag on economic recovery in 2011. Fifty-seven banks responded to the annual Federal Reserve survey, taken between Dec. 22 and Jan. 11, about credit quality. The consensus was that lending gained momentum in the fourth quarter, and there are signs that the trend will continue. About 80 percent of the banks surveyed anticipate an improving market for commercial loans to large and medium-sized firms. About 70 percent anticipate improvements in lending to smaller firms.

Consumer spending re-emerges

The Fed survey reported that 50 percent of banks anticipate improvement in the quality of consumer loans in 2011. At the same time, consumer spending beat forecasts in December, according to the Commerce department. Consumer spending rose 0.7 percent in December after a 0.3 percent bump in November. The Commerce Department also reported that incomes increased 0.4 percent for the second consecutive month. Economists expect the positive trend in consumer spending to continue with the payroll tax holiday and rising incomes. The U.S. economy expanded at a 3.2 percent annual pace in the fourth quarter, up from a 2.6 percent gain in the third quarter.

Credit card limits rise, credit score minimum drops

As the U.S. economy continues to improve, banks are making it easier for consumers to get credit cards. About 13 percent of banks in the Fed survey said approval standards for new credit cards loosened. About 14 percent of banks reduced the minimum credit score necessary to qualify for a credit card. About 11 percent increased credit card limits for consumers, and about 8 percent increased credit limits for businesses. Credit analysts are predicting that more borrowers will make on-time payments in 2011, banks will have fewer losses and the lending business will slowly return to normal.


Financial Times



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